Edgar Filing: FRANKLIN ELECTRONIC PUBLISHERS INC

[LOGO] Franklin(R)
Electronic Publishers
[LOGO] ANNUAL REPORT
March 31, 2002

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934

For the fiscal year ended March 31, 2002

Commission File Number 0-14841

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FRANKLIN ELECTRONIC PUBLISHERS,
INCORPORATED
(Exact name of the registrant as specified in its charter)

Pennsylvania 22-2476703
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)

One Franklin Plaza, Burlington, New Jersey 08016-4907
(Address of principal executive offices)

(609) 386-2500
(Registrant's telephone number)

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Securities registered pursuant to Section 12(b) of the Exchange Act:

None

Securities registered pursuant Section 12(g) of the Exchange Act:

Common Stock, no par value

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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]

As of June 21, 2002, 7,946,882 shares of common stock of the registrant were
outstanding and the aggregate market value of common stock held by
non-affiliates was approximately $10,330,000.

The registrant's Proxy Statement for its 2002 annual meeting of shareholders is
hereby incorporated by reference into Part III of this Form 10-K.

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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED

INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED MARCH 31, 2002

ITEMS IN FORM 10-K

PAGE
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PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 11
ITEM 3. LEGAL PROCEEDINGS.............................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................... 11
ITEM 6. SELECTED FINANCIAL DATA........................................ 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................ 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 37
ITEM 11. EXECUTIVE COMPENSATION......................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 40
Signatures.............................................................. 42

Except for the historical information contained herein, the matters
discussed throughout this report, including, but not limited to, those that
are stated as Franklin's belief or expectation or preceded by the word
"should" or words of similar impart are forward looking statements that
involve risks to and uncertainties in Franklin's business, including, among
other things, the timely availability and acceptance of new electronic books,
organizers, and other electronic products, changes in technology, the impact
of competitive electronic products, the management of inventories, Franklin's
dependence on third party component suppliers and manufacturers, including
those that provide Franklin-specific parts, and other risks and uncertainties
that may be detailed from time to time in Franklin's reports filed with the
Securities and Exchange Commission.

PART I

ITEM 1. BUSINESS

Franklin Electronic Publishers, Incorporated ("Franklin" or the "Company")
designs and develops handheld electronic information products, such as
electronic books (sometimes known as "eBooks") and electronic organizers.

The Company believes it is the world's largest designer, developer and
publisher of handheld electronic books, having sold more than twenty-seven
million units since 1986. The Company's electronic books are battery-powered
devices that incorporate the text of a reference work, general literature or
databases and permit the user to read selected portions on a display screen.
The Company owns or has licenses to publish and/or distribute in electronic
format more than four thousand titles, including monolingual and bilingual
dictionaries (such as Merriam-Webster's Tenth Collegiate Dictionary), the
Bible, encyclopedias (such as the Concise Columbia Encyclopedia),
entertainment-oriented publications, educational publications, medical
publications (such as the Physicians' Desk Reference(R)) and general literature.

The Company marketed its first electronic book, the Spelling Ace(R), in
1986. The Company believes that the Spelling Ace was one of the first
electronic books marketed in the United States. Beginning in 1987, Franklin
began marketing increasingly sophisticated electronic versions of thesauruses
and dictionaries and, in 1989, the Holy Bible.

In 1996, the Company acquired certain assets of the ROLODEX(R) Electronics
product line and the associated trademark license. Under this license, the
Company acquired the right to build and market databanks and organizers under
the ROLODEX(R) Electronics mark. During the quarter ended March 31, 2002, the
Company recorded a non-cash charge of approximately $11.1 million to reflect
the impairment of the value of the ROLODEX(R) Electronics mark.

In 1999, the Company introduced at retail an eBook produced by a third party
for downloading content from the Internet. That product introduction initiated
the Company's strategy of providing content for downloading from the Internet
for all handheld products. In 2001, the Company introduced at retail its
eBookMan product, a handheld electronic multimedia eBook device ("eBookMan")
for downloading multimedia content from the Internet.

The Company has expended significant resources in connection with the
development and introduction of the eBookMan product line. However, the retail
market for handheld eBook readers has not developed and grown as anticipated,
with sales to date of approximately 50,000 units, which is considerably less
than was expected. During the year ended March 31, 2002, the Company incurred a
loss of $14.8 million from eBookMan operations, including a write down of
inventory and certain other assets of $9.9 million. As of March 31, 2002, the
Company had inventory of eBookMan products with a carrying value of
approximately $1.5 million; all other assets pertaining to eBookMan have been
written off.

In 2001, the Company formed a strategic alliance with Mobipocket, SA of
Paris, France, which had been working on a cross platform solution of providing
electronic content in a single file format to all portable and desktop devices.
The Company believes this to be an important alliance, providing for Franklin's
own proprietary, generally lower-priced devices to access more content but also
enabling Franklin to leverage its content development and availability to
include access to the more than 30 million personal digital assistant platforms
and hundreds of millions of personal computers already in the market.

The Company was incorporated in 1983 in the Commonwealth of Pennsylvania as
the successor to a business commenced in 1981. The Company's principal
executive offices are located at One Franklin Plaza, Burlington, New Jersey
08016-4907, and its telephone number is (609) 386-2500.

Competitive Advantages

The Company believes that it has the following competitive advantages:

. Efficient and Cost-Effective Manufacturing Process. Franklin controls
the entire manufacturing process of its products, from design to sale,
but does not own actual manufacturing facilities. This "virtual
manufacturing" model enables the Company to produce its products in the
most cost-effective manner by allowing the Company to outsource the
manufacturing and assembly functions to third parties which meet the
Company's cost and quality specifications. In this way, the Company
maintains a high degree of flexibility and adaptability in its product
sourcing operations with minimal capital invested.

. Strong Share in Electronic Books. Franklin believes that it is the
preeminent company in the handheld electronic reference market, with
leading positions in the United States and key international markets. The
Company believes that it has dominant market share in North America,
Europe and Australia, as well as a major presence in the Middle East.
Over the past fifteen years, Franklin has sold more than twenty-seven
million units worldwide.

. Breadth and Strength of Distribution. The Company distributes its
products through 45,000 retail outlets in more than fifty countries and
through the Internet and catalog mailings direct to customers. The
Company also uses direct channels to serve multiple markets, such as the
professional, educational and customized application markets. In the
professional market, Franklin has achieved considerable success with its
electronic format medical publications. In the educational market, the
Company's electronic books are used in schools throughout the United
States. Due to the success of its electronic Bible, the Company has also
achieved substantial sales in the religious market, with Franklin
products currently distributed through Christian-affiliated bookstores.

. Technological Leadership in eBooks. Franklin has significant expertise
in providing high quality content and functionality through
cost-effective hardware designs of electronic information products. The
Company designs and has manufactured for its use proprietary
microprocessors. The Company's products combine sophisticated technology
with a user-friendly interface designed for convenient and rapid
retrieval of data. Franklin's ability to compress data and to design
systems that permit quick and intelligent information retrieval enables
it to offer compact products with high functionality. For example, the
Company stores the almost three thousand page Physicians' Desk Reference,
which fills up twenty megabytes of memory space, into the memory space of
only five megabytes which also includes sophisticated search and
retrieval functionality. The Company has been able to manufacture higher
performance products at lower cost due in part to declining prices of ROM
chips. The Company's vertically integrated research and development
effort, devoted to developing both the hardware and software for its
products, also enables it quickly to utilize cost-minimizing
technologies. As a result, the cost of Franklin's products to consumers
has decreased over the years to prices approaching those of print
versions of reference publications, offering consumers added value at
attractive price points.

. Long-standing Relationships and Licenses with Many Top Publishers. The
Company has electronic rights to over 200 reference titles, including
several versions of English and bilingual dictionaries,

Bibles, and the Physicians' Desk Reference. The Company obtains its
licenses from a variety of well-established publishers such as
Merriam-Webster, Harper/Collins, and Bertelsmann. While many of these
licenses are exclusive, all are supported by long-standing relationships
with the publishers, providing Franklin with a significant competitive
advantage. In the past year the Company has increased the scope of its
license to publish and/or distribute e-Books to over 4,000 titles which
include well known publishers such as St. Martin's Press, McGraw Hill,
AOL Time Warner and others.

Business Strategies

Franklin was the first, and strives to be the best, in electronic books. The
Company's strategy to fulfill that mission is to leverage its leading market
position by exploiting the following opportunities:

. Consumer Driven Product Development and Marketing. While the Company has
built strong distribution for its major products, it believes that
further opportunities lie in its ability to take a more marketing driven
approach to product development. The Company believes a better
understanding of its customers will allow it to boost sales, lower costs,
accelerate sell through at retail and lead to successful new product
introductions. The Company is investigating ways to better market its
North American products in the education, Hispanic, bible and travel
markets. The Company is expanding its consumer research to better
understand its customers' needs to be able to expand its solution-based
product offerings in these markets.

. Use of the Internet to Distribute Content to Handhelds. The Company
distributes e-Books on its web page (franklin.com) and other third party
websites in electronic form for downloading to a wide variety of leading
handheld platforms, including to those using the Palm OS operating system
and Microsoft Pocket PC/Windows CE operating system as well as to the
Company's own handheld electronic books. In this way, the Company expects
to leverage its expertise in refining reference data with its competitive
advantages in developing and distributing handheld products to reach a
broader installed base. The Company has developed an Internet-enabled
hardware platform to provide for portable use of content delivered from
the Company's website and other third party websites.

. Continuing Upgrade of Core Products. The Company's core product line
continues to represent the major portion of its revenue. Dictionaries,
spell correctors and Bibles have been the Company's mainstream consumer
electronics products. The Company intends to continue to upgrade and
enhance its core products.

. Investment in Marketing. The Company believes that a major opportunity
lies in broadening consumer awareness of the handheld eBook category in
order to generate mass market interest in the Company's products. To
date, the Company has engaged in limited advertising on the national or
local levels.

. International Markets. The Company has had success in selling its
products directly through wholly-owned, local subsidiaries in selected
international markets, and through distributors in other markets. Because
of the slowed growth in some international markets over the past two
fiscal years, the Company is concentrating its sales efforts in key
markets. The Company anticipates that its international sales will
continue to provide a significant portion of its revenues.

. Exploitation of OEM and Licensing Opportunities. OEM (or "Original
Equipment Manufacturer") opportunities are business agreements pursuant
to which the Company develops products for resale by its partners. The
Company has such agreements in the medical publishing and international
markets and will seek to broaden its activities to other vertical
markets. The Company believes its OEM business can be expanded as the
Company upgrades existing and develops new open system platforms. The
Company licenses its technology to preeminent companies such as Adobe
Systems, Inc. and Palm, Inc.

Risk Factors

The Company believes that the most significant risks to its business involve
those set forth below.

. Dependence on New Products and Titles. The Company depends to a certain
extent on the introduction of successful new products and titles to
generate sales growth and replace declining

revenues from certain older products and titles. The Company currently
has several new products and titles under development; however,
significant development efforts for a number of the Company's proposed
new products and titles will be required prior to their
commercialization. A significant delay in the introduction of a new
product or title could have a material adverse effect on the ultimate
success of the product or title. In addition, if revenues from new
products and titles fail to replace declining revenues from certain
existing products and titles, the Company's operating results and growth
could be adversely affected. There can be no assurance that new products
and titles currently under development will be introduced on schedule,
that they will generate significant revenues, or that the Company will be
able to introduce additional new products and titles in the future.

The Company has expended significant resources in connection with the
development and introduction of its eBookMan product line, which
commenced shipping in the fourth quarter of fiscal 2001. To date,
consumer demand for eBookMan products has not met expectations. During
the year ended March 31, 2002, Franklin incurred a loss of $14.8 million
from eBookMan operations, including a write down of inventory and certain
other assets of $9.9 million. As of March 31, 2002, the Company had
inventory of eBookMan products with a carrying value of approximately
$1.5 million. All other assets pertaining to eBookMan have been written
off.

As a result of declining sales of the Company's ROLODEX(R) Electronics
products over the last several years, during the quarter ended March 31,
2002, the Company recorded a non-cash charge of approximately $11.1
million to reflect the impairment of the value of the ROLODEX(R)
Electronics mark.

. Inventory Management. The Company's lead times are necessarily long
because of the custom nature of certain components and because most of
its components are manufactured, and its platforms are assembled, in
Asia. Accordingly, production and procurement planning are critically
related to the Company's anticipated sales volume. Any significant
deviation from projected future sales could result in material shortages
or surpluses of inventory. Shortages could cause the Company's
distribution base to shrink as customers turn to the Company's
competitors. Inventory surpluses could cause cash flow and other
financial problems, which might cause the Company to liquidate inventory
at a loss as was the case with eBookMan products. There can be no
assurance that the Company's forecasts of demand for its products will be
accurate. Inaccurate forecasts, or unsuccessful efforts by the Company to
cope with surpluses or shortages, could have a material adverse effect on
the Company's business.

. Changes in Technology. In general, the computer industry, both with
respect to software and hardware, is subject to rapidly changing
technology. Accordingly, the technology underlying the Company's products
may similarly be subject to change. The introduction of products
embodying new technologies and the emergence of new industry standards
could exert price pressure on the Company's existing products or render
such products unmarketable or obsolete. The Company's ability to
anticipate changes in technology and industry standards and to develop
and introduce new and enhanced products, as well as additional
applications for existing products, in each case on a timely and
cost-effective basis, will be a critical factor in the Company's ability
to grow and remain competitive. There can be no assurance that
technological changes will not materially adversely affect the Company's
business.

. Competition. The consumer electronics and handheld product markets are
highly competitive and characterized by rapid technological advances and
the regular introduction of new products or enhancements of existing
products. The Company believes it faces various degrees of competition at
different price points in these markets. Competitive factors include
product quality and reliability, price, performance, marketing and
distribution capability, service and reputation. There can be no
assurance that companies currently in the consumer electronics or
handheld product markets will not enter the markets in which the Company
currently markets its products. There can be no assurance that other
companies, currently in the consumer electronics industry, will not enter
the electronic book market. Many of such companies have greater capital,
research and development, marketing and distribution resources than the
Company. If new competitors emerge or the existing market

becomes more competitive, the Company could experience significant
pressure on prices and margins.

. Dependence on Key Suppliers. Certain integrated circuits essential to
the functioning of the Company's products are manufactured by a
relatively small number of overseas suppliers. Missed, late or erratic
deliveries of custom integrated circuits and other parts could materially
adversely impact the timing of new product deliveries as well as the
Company's ability to meet demand for existing products. If any one of the
integrated circuit suppliers were unable to meet its commitments to the
Company on a timely basis, such failure could have a material adverse
effect on the Company's business.

. Intellectual Property Rights. The Company owns utility and design
patents in the United States and elsewhere on its electronic books. There
can be no assurance (i) that the claims allowed under any patents will be
sufficiently broad to protect the Company's technology, (ii) that the
patents issued to the Company will not be challenged, invalidated or
circumvented or (iii) as to the degree or adequacy of protection any
patents or patent applications will afford. The Company also claims
proprietary rights in various technologies, know-how, trade secrets and
trademarks which relate to its principal products and operations, none of
which rights is the subject of patents or patent applications in any
jurisdiction. There can be no assurance as to the degree of protection
these rights may or will afford the Company. One of the Company's patents
is currently the subject of an action for declaratory judgment of
non-infringement brought by one of the Company's competitors. See "Legal
Proceedings."

. International Sales and Currency Fluctuations. The Company expects that
international sales will continue to constitute a material portion of the
Company's business. The Company's international business is subject to
various risks common to international activities, including political and
economic instability and the need to comply with export laws, tariff
regulations and regulatory requirements. There can be no assurance that
political or economic instability in any given country or countries will
not have an adverse impact on the Company's overall operations. Because
approximately 30% of the Company's sales are made in currencies other
than the U.S. dollar, the Company is subject to the risk of fluctuation
in currency values from period to period. The risk associated with
fluctuations in currency values can be expected to increase to the extent
the Company expands its international operations.

Products

Electronic Books

Franklin currently markets more than 200 electronic books in various
categories, including thesauruses, dictionaries, bilingual dictionaries, the
Bible, and educational and medical publications. Different versions of the
Company's electronic reference products use different databases and provide
various levels of functionality.

Dictionaries

Franklin's electronic spelling products (the "Spelling Ace(R)" line) operate
as phonetic spelling error detectors and correctors, puzzle solvers, word list
builders and word finders. These products permit the user to obtain the correct
spelling of a word that the user does not know how to spell correctly. For
example, if the user phonetically types in "krokodyl," the book will display a
list of seven words including, as the first choice, "crocodile." The Company
markets various versions in the Spelling Ace line incorporating different
databases. The most popular version is based on a list of over 80,000 American
English words licensed to the Company by Merriam-Webster.

The Company's top-of-the-line electronic dictionary is Merriam-Webster's
Collegiate Dictionary which is sold for use in the BOOKMAN and eBookMan lines
of products and which contains over 195,000 words and their definitions, parts
of speech, hyphenation points and different word forms (inflections). All of
the Company's electronic dictionaries provide phonetic spelling correction and
many provide thesaurus features as

well. For example, if a user enters the word "baffled," the thesaurus will
display eleven different synonyms, including "frustrated," "disappointed" and
"foiled."

The Company markets versions of its dictionaries that include speech
synthesis circuitry (based on text to speech technology in which algorithms are
used to convert text into sound) which allows the Company's products to
pronounce, in computer generated speech, relevant words contained in the
various databases. The Company also has developed and sold audible products
that use digitally recorded and compressed speech, which sounds more like a
human voice.

The Company's line of products also includes bilingual dictionaries. Each
contains more than 200,000 words in both English and either Spanish, French,
German, Arabic or Hebrew, and each provides complete translations, definitions,
verb conjugations and a gender guide, and plays a variety of language learning
games to help teach the language. The Spanish/English dictionary is marketed in
versions with and without speech synthesis for both Spanish and English words.
Each of the other bilingual dictionaries is equipped with speech synthesis for
the English words. The Company currently markets a French/German dictionary and
bilingual dictionaries for several other languages, including other language
pairs that do not include English, such as German/Italian and French/Spanish.

Franklin has a speaking dictionary designed to facilitate use by blind,
visually impaired or learning disabled individuals, as well as others with
special needs. This dictionary incorporates speech technology which pronounces
every word at user adjustable volumes and speeds. In addition, this dictionary
is equipped with full audio feedback, which allows every key on the keyboard to
speak its letter or function. Other features include a keyboard with
high-contrast lettering and raised locator dots, a large high-contrast screen
with adjustable fonts and headphones.

Children's Products

Since 1990, the Company has successfully sold children's versions of its
reference products, such as a children's dictionary based on the word list from
Webster's Elementary Dictionary. In 1997, the Company introduced a new line of
children's products which includes the Homework Wiz electronic dictionary with
a text-to-speech voice synthesizer enabling the product to speak words and
definitions.

The Bible

Franklin's electronic Holy Bible is a handheld edition of the entire text of
the Bible, which allows for retrieval of text by searches based on single
words, word groups or synonyms. For example, a search for the words "valley"
and "shadow" will retrieve the Twenty-third Psalm. Because of its built-in
ability to conduct full-text word searches, the Franklin Bible is a fully
automated concordance. The Company sells the Bible on its BOOKMAN platform and
on cards designed for use with its BOOKMAN platform. The Company sells both the
King James and the New International versions of the Bible, as well as a
children's version of the Bible, and markets a Bible question-and-answer card.
The Company also sells a speaking version of its King James Bible.

Medical Publications

The Company develops and markets a broad range of titles for health care
professionals for use on a variety of handheld platforms.

The Pocket PDR(TM) Medical Book System comes with two card slots and a broad
range of titles. The platform uses Franklin's proprietary microprocessor and
has an 8-line screen which is particularly useful when accessing and viewing
drug information monographs. Available book cards for the Pocket PDR(TM)
Medical Book System include the Physicians' Desk Reference, The Merck Manual,
The Washington Manual of Medical Therapeutics, The Medical Letter Handbook of
Adverse Drug Interactions, and Griffith's Five-Minute Clinical Consult.

In the 2001 fiscal year, the Company launched an eBookMan device targeted
towards the healthcare community which is bundled with two leading drug
references on multimedia memory cards (MMC): the 2001 Physicians' Desk
Reference for physicians distributed by Medical Economics, a division of
Thomson Healthcare, and the 2001 American Hospital Formulary Service
distributed by the American Society of Health-System Pharmacists to
hospital-based pharmacists. The 2002 Physicians' Desk Reference is available
for eBookMan devices as a download from the Internet. The Company has developed
a 2002 version of the card for the American Society of Health System
Pharmacists.

The Company's development of certain medical titles for use in a variety of
handheld platforms continued during the 2002 fiscal year. Most titles available
for the Medical Book System were developed for the Palm OS operating system,
both as downloads and as Springboard modules for the Visor platform, as well as
for the Microsoft Windows CE operating systems. The titles are available for
download at franklin.com.

Entertainment Titles

The Company sells a Crossword Puzzle Solver electronic book which provides
correct spelling for over 250,000 words and phrases from Merriam-Webster's
Official Crossword Puzzle Dictionary for use by word puzzle enthusiasts. The
Company is investigating making certain entertainment titles available for
downloading from its website into a variety of handheld platforms and currently
offers a series of downloadable crossword puzzles for Palm OS compatible
devices.

International Titles

The Company has developed and produced British English versions of its
American English electronic reference products for international markets,
particularly the United Kingdom and Australia. The Company has monolingual
electronic reference products for the French market and eBook products for the
German-speaking market. The Company has omnibus agreements for publishing
electronic reference products with two major European publishers, Bertelsmann
and Havas, under which Franklin has developed titles in handheld electronic
platforms and ROM cards. Havas publishes dictionaries,thesauruses,
encyclopedias and other works under the following well known French trademarks:
Le Robert, Larousse, Nathan, Dalloz, Masson and Bouquins.

Through a Company subsidiary, Proximity Technology, Inc., the Company
designs linguistic software that performs spelling error detection and
correction, thesaurus and dictionary functions in conjunction with databases of
words in 20 languages and dialects. The Company licenses this software for use
in computers of all sizes, as well as on the Internet.

Electronic Organizers

In 1997, the Company began to sell a line of organizers and databanks under
the ROLODEX(R) trademark which had been licensed by the Company late in 1996.
Since acquiring the ROLODEX(R) Electronics product line, the Company has
updated and improved both low priced databanks, that allow users to store and
retrieve names and telephone numbers, and higher priced and more advanced
personal organizers, that can interface with desktop PCs. During the quarter
ended March 31, 2002, the Company recorded a non-cash charge of approximately
$11.1 million for the impairment of the value of the ROLODEX(R) Electronics
mark.

Internet Enabled Content and Devices

The Company offers versions of certain reference works, including the
Physicians' Desk Reference and the Bible, from its website, franklin.com, for
downloading to handheld devices using the Palm OS operating system and
Microsoft Windows CE operating system. The three eBookMan models feature large
240x200 pixel displays that display 87% more information than today's most
popular handhelds. Users can adjust the font size or switch the display to
landscape mode for easy reading. All three models use natural handwriting
recognition and include

an eBook Reader, an audio book player, an MP3 compatible music player, an
address book, a date book, a to-do book and a memo book. Each eBookMan model is
equipped with a USB port for connection to a PC (an optional serial connection
is also available) and features optional memory expansion through industry
standard multimedia memory cards.

The Company has expended significant resources in connection with the
development and introduction of the eBookMan product line, which commenced
shipping in the fourth quarter of fiscal 2001. However, the retail market for
handheld eBook readers has not developed and grown as anticipated, with sales
to date of approximately 50,000 units, which is considerably less than was
expected. During the year ended March 31, 2002, the Company incurred a loss of
$14.8 million from eBookMan operations including write down of inventory and
certain other assets of $9.9 million. As of March 31, 2002, the Company had
inventory of eBookMan products with a carrying value of approximately $1.5
million. All other assets pertaining to eBookMan have been written off.

Research And Development And Content Acquisition

The Company has a group of approximately thirty persons that perform
research and development relating to new electronic products as well as
improvements to existing products. The Company focuses its hardware development
efforts on creating new platforms.

The Company maintains a full-time internal development group of hardware and
software engineers dedicated to the critical function of developing proprietary
microprocessors and VLSIs that integrate the Company's proprietary
microprocessor or general purpose microprocessors and custom design circuits
for electronic products. Through this extensive effort, the Company is able to
reduce the cost of components for its platforms and cards on an ongoing basis.
The Company regularly engages in programs to redesign its platforms and to
develop new VLSIs for its products. The Company has also contracted for
software development work in Russia, India and the Far East.

Manufacturing

The Company arranges for the assembly of its products by placing purchase
orders with established third-party manufacturers in China, Malaysia and
Thailand. The Company believes that it could locate alternate manufacturers for
its products if any of its current manufacturers is unable, for any reason, to
meet the Company's needs.

The Company designs certain custom integrated circuits, which are
manufactured by third parties for use in the Company's products. Franklin also
creates the mechanical, electronic and product design for its hardware
platforms and designs and owns the tools used in the manufacture of its
products. The Company's electronic products are based on the Company's
proprietary microprocessor or general purpose microprocessors and
custom-designed ROM chips and general purpose static random access memory
chips. The Company designs VLSIs that integrate its proprietary or general
purpose microprocessors and custom-designed circuits in order to reduce the
cost of the components in its platform. In order to minimize the effect of any
supplier failing to meet the Company's needs, the Company generally attempts to
source these parts from multiple manufacturers. In those cases where the
Company chooses to use a single source for economic reasons, alternative
suppliers are generally available.

The Company utilizes its office in Hong Kong to facilitate component
procurement and manufacturing. On-site quality control inspection of electronic
products is conducted by its employees in China, Malaysia and Thailand. The
Company's products are generally shipped at the Company's expense to its
facility in New Jersey, where the Company maintains inspection, quality
control, packaging, warehousing and repair operations for distribution in the
United States, and to similar facilities in Europe and elsewhere for its
foreign operations.

Sales And Marketing

Franklin's products are marketed domestically through the Company's own
sales and marketing force and through independent sales representative
organizations, which are supervised by the Company's internal sales department.

Consumer Sales

Franklin's products are sold in over 30,000 retail establishments in the
United States. These are comprised of mass market retailers, discount chains,
bookstores, independent electronic stores, department stores and catalog
companies such as The Sharper Image. Consumers can also order products directly
from Franklin by calling 1-800-BOOKMAN or by visiting the Company's website at
franklin.com. The Company sells through several large retail chains, including
Radio Shack, Staples, Office Depot, Target and Best Buy.

Franklin commonly participates in and provides financial assistance for its
retailers' promotional efforts, such as in-store displays, catalog and general
newspaper advertisements. The Company promotes its products with advertisements
in magazines and newspapers. The Company also promotes its products at trade
shows, including the Consumer Electronics Show, and advertises in trade
magazines.

International Sales

The Company sells its products worldwide through its wholly-owned local
subsidiaries and a network of independent distributors. Franklin has
subsidiaries in the United Kingdom, France, Canada, Germany, Mexico and
Australia, that market and distribute the Company's products, including those
specifically developed for these markets.

OEM Markets

The Company produces custom products for third parties. The Company has
developed custom products including the Larousse Copiloto for a Spanish print
encyclopedia publisher as well as a speaking version of the alMawrid, an
Arabic-English bilingual dictionary for sale in the Middle East. The Company
continues to pursue opportunities for custom versions of its products.

Patents, Trademarks And Copyrights

The Company owns more than twenty United States utility and design patents
on its electronic reference products and a number of international patents on
its products. The Company actively pursues the acquisition and enforcement of
patent rights and, in furtherance thereof, maintains an ongoing program to
apply for and prosecute patent applications and to enforce its rights in
patents that issue therefrom.

Franklin owns certain trademark rights, including "Franklin(R)",
"BOOKMAN(R)", "eBookMan", "Spelling Ace(R)", "Wordmaster(R)", "Next Century(R)"
and "Language Master" and has an exclusive license for the mark ROLODEX(R)
Electronics in the United States and various foreign countries.

Copyrights to certain word lists incorporated in the Company's electronic
books are the property of the Company's licensors. The Company owns copyrights
in certain programs and algorithms used in, as well as the compilations of, its
electronic books. See "Legal Proceedings."

Competition

The Company is the market leader for handheld electronic books. The
Company's main domestic competitor in the electronic book category is Seiko
Instruments USA Inc. ("Seiko"), which markets spelling correctors, thesauruses
and dictionaries. The Company faces various degrees of competition at different
price

points in the consumer market. The Company's major competitor, Seiko, focuses
primarily on the modestly- priced end of the market. The Company's main
international competitors are Lexibook, which markets French monolingual
spelling correctors, thesauruses and dictionaries in France, and Hexaglot,
which markets German-centric bilinguals and translators in Germany.

Competitive factors for electronic reference products are product quality
and reliability, functionality, price, performance, speed of retrieval, quality
of underlying databases, quality of spelling correction, portability, marketing
and distribution capability, service and corporate reputation. The Company
believes it is the leader in respect of each such factor.

The Company's reference products enjoy a reputation for quality resulting
from their content, hardware design and easy-to-use applications. The Company's
reference products are characterized by their capacity to permit the user to
define the kind of information being sought and to provide information
responsive to the user's request.

Sharp Electronics, Casio, and Royal are the Company's primary competitors in
electronic organizers. Competitive factors for electronic organizers and
personal computer companion products are size, product quality and reliability,
functionality, price, performance, marketing and distribution capability and
corporate reputation. The Company believes that it competes effectively in the
electronic organizer market in respect of each of these factors.

A number of prominent electronics manufacturers, including Palm Inc.,
Handspring, Inc., 3Com, Sharp Electronics Corporation, Casio, Royal, Psion, LG
Electronics, Gemstar TV Guide International Group and Hewlett-Packard Company,
market palmtop personal organizer products, personal digital assistants,
electronic books, computer peripherals, or general usage personal computers
that offer varying degrees of electronic reference capabilities and personal
information management functions. Many competitors in this market have greater
capital, research and development, marketing and distribution resources than
the Company and there can be no assurance that the Company can successfully
compete in this market.

Employees

As of June 19, 2002, the Company employed approximately 145 persons in the
United States, approximately 27 persons in Asia, and approximately 50 persons
in international sales and marketing subsidiaries. None of the Company's
employees is represented by a union. The Company believes its relations with
its employees are satisfactory.

EXECUTIVE OFFICERS OF THE REGISTRANT

See Item 10 for information regarding the Company's executive officers.

* * *

Merriam-Webster's is a trademark of Merriam-Webster, Inc.; Physicians' Desk
Reference and Pocket PDR are trademarks of Medical Economics Data, a division
of Medical Economics Company, Inc.; Palm is a trademark of Palm Inc.; Windows
is a trademark of Microsoft Corporation; Handspring and Visor are trademarks of
Handspring, Inc; and ROLODEX(R) is a registered trademark of Berol Corporation,
a division of Newell Rubbermaid Inc.

ITEM 2. PROPERTIES

The Company owns a 90,000 square foot corporate headquarters in Burlington,
New Jersey. The Company believes this facility will satisfy its foreseeable
needs for office, laboratory and warehousing space.

ITEM 3. LEGAL PROCEEDINGS

In April 2002, LeapFrog Enterprises, Inc. of Emeryville, California filed an
action for declaratory judgment of non-infringement of the Company's United
States Patent entitled "Word Spelling and Definition Educational Device."
Franklin's patent, issued in 1993, covers electronic language skills teaching
aid machines and systems to aid in the teaching of language skills, such as the
Company's Homework Wiz(R) products. The Company believes that LeapFrog's filing
for declaratory judgment will have no adverse financial effect on Franklin. In
April 2002, the Company filed a patent infringement claim against LeapFrog
alleging that LeapFrog's products infringe on the Company's patent.

The Company is subject to other litigation from time to time arising in the
ordinary course of its business. The Company does not believe that any such
litigation is likely, individually or in the aggregate, to have a material
adverse effect on the financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the American Stock Exchange (the
"AMEX") under the symbol "FEP." Prior to June 18, 2001, the Company's common
stock was traded on the New York Stock Exchange (the "NYSE"). The following
table sets forth the range of the high and low closing sales prices as reported
by the NYSE and the AMEX, as applicable, for the last two fiscal years:

Sales
---------------
Quarter Ended High Low
------------- -------- ------

June 30, 2000...... 9.5 5.3125
September 30, 2000. 12.375 7.5
December 31, 2000.. 11.875 4.25
March 31, 2001..... 7.140625 3.00

June 30, 2001...... 4.20 2.50
September 30, 2001. 2.60 1.20
December 31, 2001.. 2.00 1.10
March 31, 2002..... 2.74 1.40

The approximate number of holders of record of the common stock as of June
14, 2002 was 900.

The Company has not declared cash dividends on the common stock and does not
have any plans to pay any cash dividends on the common stock in the foreseeable
future. The Board of Directors of the Company anticipates that any earnings
that might be available to pay dividends on the common stock will be retained
to finance the business of the Company and its subsidiaries.

ITEM 6. SELECTED FINANCIAL DATA

The following tables should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto and the "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
section appearing elsewhere herein.

Year Ended March 31,
----------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- -------- --------
Statements Of Operations Data

Sales....................................... $ 71,025 $79,966 $97,078 $104,435 $100,747
Cost of Sales............................... 41,416 45,568 61,223 81,209 56,866
Write-down of eBookman Inventory and Product
Costs..................................... 8,622 -- -- -- --
-------- ------- ------- -------- --------
Gross Margin................................ 20,987 34,398 35,855 23,226 43,881
-------- ------- ------- -------- --------
Expenses:
Sales and marketing........................ 21,090 17,668 21,397 29,570 22,810
Research and development................... 3,952 3,973 4,215 5,740 5,537
General and administrative................. 9,456 9,752 11,746 20,283 12,912
Trademark impairment....................... 11,147 -- -- -- --
-------- ------- ------- -------- --------
Total operating expenses................. 45,645 31,393 37,358 55,593 41,259
-------- ------- ------- -------- --------
Operating Income (Loss)..................... (24,658) 3,005 (1,503) (32,367) 2,622
Interest expense........................... (1,514) (1,712) (3,086) (3,554) (3,385)
Interest and investment income............. 158 217 355 674 1,883
Other, net................................. (622) (596) (1,162) (656) (590)
Gain on Sale of REX........................ -- -- 8,072 -- --
-------- ------- ------- -------- --------
Income (Loss) Before Income Taxes........... (26,636) 914 2,676 (35,903) 530
Income Tax (Benefit) Provision.............. -- -- -- (5,712) (899)
-------- ------- ------- -------- --------
Net Income (Loss)........................... $(26,636) $ 914 $ 2,676 $(30,191) $ 1,429
-------- ------- ------- -------- --------
Preferred Stock Dividend.................... 267 -- -- -- --
-------- ------- ------- -------- --------
Net Income (Loss) Applicable to Common
Stockholders.............................. $(26,903) $ 914 $ 2,676 $(30,191) $ 1,429
======== ======= ======= ======== ========
Net Income (Loss) Per Common Share:
Basic...................................... $ (3.38) $ 0.12 $ 0.34 $ (3.81) $ 0.18
======== ======= ======= ======== ========
Diluted.................................... $ (3.38) $ 0.11 $ 0.34 $ (3.81) $ 0.18
======== ======= ======= ======== ========
Weighted Average Common Shares:
Basic...................................... 7,948 7,922 7,861 7,923 8,069
======== ======= ======= ======== ========
Diluted.................................... 7,948 8,217 7,931 7,923 8,156
======== ======= ======= ======== ========

At March 31,
----------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- -------- --------
Balance Sheet Data
Working Capital............................. 12,164 $26,871 $20,777 $ 4,142 $ 74,783
Total Assets................................ 47,302 80,028 70,060 107,320 136,188
Long-term Liabilities....................... 11,459 13,947 11,690 1,541 45,089
Shareholders' Equity........................ 24,308 50,278 46,138 43,045 74,746

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

For the year ended March 31, 2002, the Company incurred a net loss of $26.6
million, or $3.38 per share, compared with net income of $.9 million or $.12
per share, in the prior year. The current year's loss resulted primarily from a
loss of $14.8 million from the Company's eBookMan(R) operations, a charge of
$11.1 million for impairment of the value of the ROLODEX(R) Electronics
trademark, severance accruals of $.5 million, consolidation and restructuring
costs of European subsidiaries of $.5 million, and a prior year tax assessment
in a Belgian subsidiary of $.3 million.

Net income for the year ended March 31, 2001, was $.9 million, or $.12 per
share, compared with net income of $2.7 million, or $.34 per share, in the
prior year. Results for the year were negatively affected, in part, by a $2.6
million decrease in technology licensing revenue, a $5.4 million decline in
sales of ROLODEX(R) Electronics organizer products, and a $2.2 million decrease
in sales of reference products in the United Kingdom.

Results of Operations

The following table summarizes the Company's historical results of
operations as a percentage of sales for fiscal 2002, 2001, and 2000:

Year Ended March 31,
--------------------------
2002 2001 2000
------- ------- -------

Sales:
Domestic................................. $46,657 $50,374 $64,075
International............................ 24,368 29,592 33,003
------- ------- -------
Total Sales.......................... $71,025 $79,966 $97,078
======= ======= =======

As a Percentage of Total Sales
Domestic................................. 65.7 63.0 66.0
International............................ 34.3 37.0 34.0
------- ------- -------
Sales.................................... 100.0% 100.0% 100.0%
Cost of Sales............................ 70.5 57.0 63.1
Gross Margin............................. 29.5 43.0 36.9

Expenses:
Sales and Marketing...................... 29.7 22.1 22.0
Research and Development................. 5.6 5.0 4.3
General and Administrative............... 13.3 12.2 12.1
Trademark Impairment..................... 15.7 -- --
------- ------- -------
Total operating expenses............. 64.3 39.3 38.5
------- ------- -------

Operating Income (Loss)..................... (34.7) 3.8 (1.5)
Interest expense......................... (2.1) (2.1) (3.2)
Interest and Investment income........... 0.2 0.3 0.4
Other, net............................... (0.9) (0.7) (1.2)
Gain on sale of REX...................... -- -- 8.3
------- ------- -------

Income (Loss) Before Income Taxes........... (37.5) 1.1 2.8
Income Tax (Benefit) Provision.............. -- -- --
------- ------- -------
Net Income (Loss)........................... (37.5) 1.1 2.8
------- ------- -------
Preferred stock dividend.................... (0.4) -- --
Net income (loss) applicable to common stock (37.9%) 1.1% 2.8%
======= ======= =======

Year Ended March 31, 2002, Compared With Year Ended March 31, 2001

A comparative summary of operations for the Company's core business
(Reference and ROLODEX(R) Electronics products) and eBookMan product lines is
shown below.

Year Ended March 31, 2002 Year Ended March 31, 2001
---------------------------- -------------------------
Core eBookMan Total Core eBookMan Total
-------- -------- -------- ------- -------- -------

Sales............................... $ 68,544 $ 2,471 $ 71,025 $74,757 $ 5,209 $79,966
Cost of Sales....................... 38,566 2,850 41,416 41,135 4,433 45,568
Write-down of eBookMan Inventory and
Product Costs..................... -- 8,622 8,622 -- -- --
-------- -------- -------- ------- ------- -------
Total Cost of Sales................. 38,566 11,472 50,038 41,135 4,433 45,568
-------- -------- -------- ------- ------- -------
Gross Margin........................ 29,988 (9,001) 20,987 33,622 776 34,398

Operating Expenses.................. 29,389 5,109 34,498 26,867 4,526 31,393
Trademark Impairment................ 11,147 -- 11,147 -- -- --
-------- -------- -------- ------- ------- -------
40,536 5,109 45,645 26,867 4,526 31,393
-------- -------- -------- ------- ------- -------
Operating Income (Loss)............. (10,548) (14,110) (24,658) 6,755 (3,750) 3,005
Interest and Other.................. (1,263) (715) (1,978) (2,091) -- (2,091)
-------- -------- -------- ------- ------- -------
Net Income (Loss)................... $(11,811) $(14,825) $(26,636) $ 4,664 $(3,750) $ 914
======== ======== ======== ======= ======= =======

Sales for the year ended March 31, 2002, were $71.0 million compared with
$79.9 million in the prior year. The primary reasons for the decline in sales
were lower European sales of $4.4 million ($3.1 million reference, $1.2 million
eBookMan, and $.1 million other), a decrease of $1.9 million in Medical
Division sales attributable to increased competition with lower hardware sales
as the business shifted to downloading medical titles from the Internet, a
reduction in Australian sales of $.6 million because of lower eBookMan sales,
and lower U.S. consumer sales of Rolodex(R) Electronic products, $1.0 million,
and eBookMan products, $.5 million.

Gross margin in the current year was $21.0 million, or 29.5%, of sales
compared with $34.4 million, or 43.0%, of sales in the prior period. The lower
gross margin resulted primarily from the write-down of $8.6 million of eBookMan
inventory and related product costs, $.5 million of eBookMan price protection
and $4.3 million from lower sales. The gross margin on the Company's core
reference and ROLODEX(R) Electronics product lines was $30.0 million, or 43.6%,
compared with $33.6 million, or 44.9%, in the prior period. The higher gross
margin percentage in the prior period resulted primarily from the absorption of
$.7 million of overhead expense by the eBookMan products in that period. The
core business gross margin was approximately the same in both periods without
the allocation to eBookMan.

Operating expenses increased to $34.5 million from $31.4 million last year.
The increase was primarily attributable to an increase in selling expenses of
$3.4 million to $21.1 million from $17.7 million resulting from higher
advertising, promotion, and trade show expenses relating to eBookMan products
of $1.0 million, an increase in salaries of $.9 million resulting primarily
from $.5 million of severance pay, and higher staffing levels for eBookMan,
increased core business advertising allowances of $.6 million, and the accrual
of a prior year Belgian tax of $.3 million.

Research and development expense was $4.0 million in both years. Last year's
expense was net of $3.1 million of capitalized expenses while the current
year's expense was net of $1.1 million of capitalized expenses.

General and administrative expense decreased to $9.4 million from $9.7
million in the prior year. The decrease results primarily from lower salary and
fringe expense of $.5 million, lower depreciation and amortization of $.2
million, and provision for bad debts of $.2 million offset by warehouse costs
of $.2 million from outsourcing some European warehouses and increased
professional fees of $.3 million necessitated by staff turnover in Europe in
the current year. Prior year expenses were reduced as a result of a favorable
settlement in litigation brought by the Company.

Interest expense declined from $1.7 million in the year ended March 31, 2002
to $1.5 million for the year ended March 31, 2001 because of the prepayment of
$8.4 million of 12-1/2% Senior Notes in December 2001 and then meeting credit
needs with the Company's Revolving Credit Facility with an effective rate of 6%.

Year Ended March 31, 2001 Compared With Year ended March 31, 2000

Sales for the year ended March 31, 2001 were $80 million compared with sales
of $97.1 million in the prior year. During the year ended March 31, 2000 the
Company sold its REX product line and discontinued its Rocket eBook product
line, which accounted for sales of $6.1 million and $1.8 million, respectively,
in the year ended March 31, 2000. The decrease in sales from the prior year is
also attributable to a $2.6 million decrease in technology licensing revenue, a
$5.4 million decline in sales of ROLODEX Electronics organizer products, a $2.2
million decrease in sales of reference products in the United Kingdom and a $.7
million decrease in sales by Voice Powered Technology International, Inc.
("VPTI"), the Company's 82% owned subsidiary. In addition, the continuing
weakness in foreign currencies against the US dollar accounted for an
approximately $3.0 million reduction in sales. These decreases were partially
offset by $5.2 million of sales of eBookMan which was introduced in the fiscal
year ended March 31, 2001.

Gross margin for the year ended March 31, 2001 was $34.4 million, or 43%,
compared with $35.9 million, or 37% in the prior year. The primary reasons for
the gross margin percentage increase for the year ended March 31, 2001 were the
inclusion in the prior year of an inventory writedown and price protection of
$2.6 million in connection with the discontinued Rocket eBook product line and
the incurrence in the prior year of costs associated with the transition to new
upgraded reference and ROLODEX(R) Electronics product lines. In addition,
during the year ended March 31, 2001, lower margin ROLODEX(R) Electronic
products represented 16% of sales compared with 19% of sales in the prior
period.

Total operating expenses decreased from $37.4 million in the year ended
March 31, 2000 to $31.4 million in the year ended March 31, 2001. Sales and
marketing expense decreased by $3.7 million, or 17%, to $17.7 million. The
decrease in sales and marketing expense resulted primarily from a $1.4 million
reduction in expenses that vary directly with sales such as commissions,
allowances and freight, a $1 million reduction in expenses related to
development of the Company's website, and lower personnel expenses of $.7
million.

Research and development expense in the year ended March 31, 2001 decreased
to $4.0 million from $4.2 million in the prior year as a $1.1 million increase
in personnel costs and a $.5 million increase in outside development costs were
offset by the capitalization of $3.0 million (including $2.2 of capitalized
costs relating to the new eBookMan platform) of research and development costs
in the year needed March 31, 2001 compared with $1.5 million in the prior year.

General and administrative expense decreased by $2 million, or 17%, to $9.7
million for the year ended March 31, 2001. The reduction in general and
administrative expense was primarily due to a $.9 million decrease in
amortization of deferred computer software and patents, a $.4 million decrease
in accounts receivable provisions and a $.5 million reduction in expenses
incurred by VPTI.

Interest expense declined from $3.1 million in the year ended March 31, 2000
to $1.7 million for the year ended March 31, 2001 due to lower debt levels
during the 2001 fiscal year. Other, net consists of transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the US dollar.

Because of net operating loss carryforwards, income taxes have been offset
by a reduction in the income tax valuation allowance.

Inflation and Currency Transactions

Inflation had no significant effect on the operations of the Company for the
three years ended March 31, 2002. However, competitive pressures and market
conditions in the future may limit the Company's ability to increase prices to
compensate for general inflation or increases in prices charged by suppliers.

The Company's operating results may be affected by fluctuations in currency
exchange rates. During the years ended March 31, 2001 and 2002, the Company
entered into several foreign exchange forward contracts with financial
institutions to limit its exposure to currency fluctuation loss on sales made
by its European subsidiaries.

Seasonality

The Christmas selling season (October, November and December) and the "back
to school" season (mid-August to mid-September) are the strongest selling
periods for the Company's products. The timing of the publication of new books
may also significantly affect revenues and cause quarterly revenues and
earnings fluctuations.

The following table sets forth unaudited net sales for each of the Company's
last twelve fiscal quarters:

Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30 September 30 December 31 March 31
------------- ------------- ------------- -------------
(dollars in thousands)

Fiscal 2002 $16,009 $18,714 $23,284 $13,018
Fiscal 2001 17,052 20,511 22,434 19,969
Fiscal 2000 19,936 30,445 31,397 15,300

Future Income Tax Benefits

The Company has income tax benefits of $18.5 million which can be utilized
against future earnings. Further, as a result of the VPTI acquisition, the
Company has additional future income tax benefits of $9.3 million which can be
utilized against future earnings of VPTI. The Company has provided an income
tax valuation allowance of $22.1 million against these tax assets. The
remaining $5.7 million balance represents the amount that the Company believes
that it can reasonably expect to utilize in the foreseeable future.

Liquidity and Capital Resources

The Company had cash and cash equivalents of $2.5 million at March 31, 2002
compared with $2.8 million at March 31, 2001.

During the year ended March 31, 2002, the Company paid all of its 12-1/2%
Senior Notes outstanding in the amount of $10.4 million.

In March 2001, Dr. James H. Simons, the Company's Chairman of the Board,
subscribed to 3,500 share of the Company's Series A 10% Convertible Preferred
Stock ("Convertible Preferred Stock") in consideration for the payment of
$3,500,000 which was made in April 2001. No placement agent was used in
connection with this transaction. Each share of Convertible Preferred Stock has
a stated value ("Stated Value") of one thousand dollars.

The Convertible Preferred Stock may be converted at any time at the election
of the holder thereof. Each share of Convertible Preferred Stock is initially
convertible into that number of shares of common stock as is determined by
dividing the Stated Value by $5 (the "Conversion Price") which amounts to
753,375 shares of common stock at the present time.

If at any time while the Convertible Preferred Stock is outstanding the
Company sells publicly or privately (i) shares of its common stock (other than
any shares of common stock that may be issued pursuant to the Company's
Restricted Stock Plan or any successor thereto or upon the exercise of any
options theretofore or thereafter granted by the Company to employees,
directors or consultants), (ii) securities convertible into shares of its
common stock, or (iii) options or warrants (other than options issued to
employees, directors or consultants)

to purchase shares of its common stock or securities convertible into shares of
its common stock at a sale, conversion, or exercise price per share, as the
case may be, less than the Conversion Price then in effect, the Conversion
Price shall be reset to the sale, conversion or exercise price per share, as
the case may be.

In December 1999, the Company entered into a $25 million secured financing
facility which originally was scheduled to expire on December 7, 2002. In
January 2002 the maturity of the secured financing facility was extended to
December 7, 2004. Borrowings under the revolving credit facility bear interest
at the bank's prime rate (4.75% at March 31, 2002) plus 3/4%, and the real
property and equipment advances under the facility in the amount of $4.3
million bear interest at the rate of prime plus 1-1/2%. The facility contains
certain financial covenants and restrictions on indebtedness, dividend
payments, business combinations, and other related items. As of March 31, 2002,
no amounts were available for paying dividends. Borrowings are collateralized
by substantially all assets of the Company. As of March 31, 2002 the Company
had an outstanding balance of $10.1 million under the facility and is in
compliance with all covenants.

Management believes that cash flow from operations and the secured financing
facility will be adequate to provide for the Company's liquidity and capital
needs for the foreseeable future.

The Company has no material commitments for capital expenditures in the next
twenty-four months.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures. On an ongoing
basis, the Company evaluates its estimates and judgments based on historical
experience and various other factors that are believed to be reasonable under
the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The Company annually reviews its financial
reporting and disclosure practices and accounting policies to ensure that its
financial reporting and disclosures provide accurate and transparent
information relative to the current economic and business environment. The
Company believes that of its significant accounting policies (see summary of
significant accounting policies more fully described on Note 2 of notes to our
consolidated financial statements), the following policies involve a higher
degree of judgment and/or complexity:

eBookman assets--The Company periodically reviews the eBookman assets
relative to physical and historical factors, economic factors and industry
trends. During the year ended March 31, 2002, the Company recorded a write-down
of eBookman assets in the amount of $9,874. As of March 31, 2002 the Company
had inventory of eBookman products with a carrying value of approximately $1.5
million. All other assets pertaining to eBookman have been written off.

Asset impairment--In assessing the recoverability of the Company's fixed
assets, goodwill and other non-current assets, the Company considers changes in
economic conditions and makes assumptions regarding estimated future cash flows
and other factors. During the year ended March 31, 2002, the Company recorded a
charge for impairment in value of its ROLODEX(R) Electronics trademark of
$11,147.

Recent Accounting Pronouncements

In June 2001, The Financial Accounting Standards Board (FASB) issued SFAS
No.141, Business Combinations, and SFAS No.142, Goodwill and Other Intangible
Assets. The Company is required to adopt SFAS No.141 for all business
combinations completed after June 30, 2001. This standard requires that
business combinations initiated after June 30, 2001, be accounted for under the
purchase method. Goodwill and other intangible assets that resulted from
business combinations before July 1, 2001, must be reclassified to conform to
the requirements of SFAS No. 142, as of the statement adoption date.

The Company will adopt SFAS No.142 at the beginning of April 2002 for all
goodwill and other intangible assets recognized in the Company's statement of
financial position as of April 1, 2002. This standard changes the
accounting for goodwill from an amortization method to an impairment-only
approach, and introduces a new model for determining impairment charges.

The Company estimates that the implementation of these standards will reduce
amortization expense by approximately $300 per year. The Company will no longer
amortize goodwill.

The Company's Intangible Assets are stated at fair value after an impairment
charge as stated in Note 2.

Additionally, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" during 2001. SFAS No. 143 related to obligations which
generally are incurred in connection with the ownership of real property. SFAS
No. 144 superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board Opinion No.30, "Reporting
the Results of Operations and Transactions," "Reporting the Effects of Disposal
of a Segment of a Business," and "Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a business.
SFAS No. 144 also amended Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Company believes
the adoption of these standards will have no material impact on its financial
condition, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145. This Statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements. The Company does not expect
this Statement to have any material impact on its financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

Page
----

Independent Auditor's Report.................. 20
Consolidated Statements of Operations
Years ended March 31, 2002, 2001 and 2000. 21
Consolidated Balance Sheets
March 31, 2002 and 2001................... 22
Consolidated Statements of Cash Flows
Years ended March 31, 2002, 2001 and 2000. 23
Consolidated Statement of Shareholders' Equity
Years ended March 31, 2002, 2001 and 2000. 24
Notes to Consolidated Financial Statements
Years ended March 31, 2002, 2001 and 2000. 25

INDEPENDENT AUDITORS' REPORT

Shareholders and Directors of
Franklin Electronic Publishers, Incorporated
Burlington, New Jersey 08016

We have audited the accompanying consolidated balance sheets of Franklin
Electronic Publishers, Incorporated and subsidiaries as of March 31, 2002 and
March 31, 2001 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years ended March 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Electronic
Publishers, Incorporated and subsidiaries as of March 31, 2002 and March 31,
2001, and the results of its operations and cash flows for each of the three
years ended March 31, 2002 in conformity with accounting principles generally
accepted in the United States.

/s/RADIN, GLASS & CO., LLP
Certified Public Accountants

New York, New York
June 12, 2002

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except for per share data)

Year Ended March 31,
--------------------------
2002 2001 2000
-------- ------- -------

Sales.............................................. $ 71,025 $79,966 $97,078
Cost of Sales...................................... 41,416 45,568 61,223
Write-down of eBookMan Inventory and product costs. 8,622 -- --
-------- ------- -------
Gross Margin....................................... 20,987 34,398 35,855
-------- ------- -------
Expenses:
Sales and marketing............................. 21,090 17,668 21,397
Research and development........................ 3,952 3,973 4,215
General and administrative...................... 9,456 9,752 11,746
Trademark impairment............................ 11,147 -- --
-------- ------- -------
Total operating expenses.................... 45,645 31,393 37,358
-------- ------- -------
Operating Income (Loss)............................ (24,658) 3,005 (1,503)

Interest expense................................ (1,514) (1,712) (3,086)
Interest and investment income.................. 158 217 355
Other, net...................................... (622) (596) (1,162)
Gain on Sale of REX............................. -- -- 8,072
-------- ------- -------
Income (Loss) Before Income Taxes.................. (26,636) 914 2,676
Income Tax (Benefit) Provision..................... -- -- --
-------- ------- -------
Net Income (Loss).................................. $(26,636) $ 914 $ 2,676
-------- ------- -------
Preferred Stock Dividend........................... 267 -- --
-------- ------- -------
Net Income (Loss) Applicable To Common Stockholders $(26,903) $ 914 $ 2,676
======== ======= =======
Net Income (Loss) Per Common Share:
Basic........................................... $ (3.38) $ 0.12 $ 0.34
======== ======= =======
Diluted......................................... $ (3.38) $ 0.11 $ 0.34
======== ======= =======
Weighted Average Common Shares:
Basic........................................... 7,948 7,922 7,861
======== ======= =======
Diluted......................................... 7,948 8,217 7,931
======== ======= =======

See notes to consolidated financial statements.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

March 31,
-----------------
2002 2001
-------- -------

Assets
Current Assets:
Cash and cash equivalents (Note 3)................................................ $ 2,497 $ 2,835
Accounts receivable, less allowance for doubtful accounts of $1,112 and $1,161.... 6,932 12,094
Preferred stock subscriptions receivable.......................................... -- 3,500
Inventories (Note 4).............................................................. 11,107 20,879
Income tax receivable............................................................. 809 568
Prepaids and other assets......................................................... 2,354 2,798
-------- -------
Total Current Assets.............................................................. 23,699 42,674
-------- -------
Property and Equipment (Note 5)...................................................... 6,988 7,651
-------- -------
Other Assets:
Deferred income tax asset (Note 12)............................................... 5,700 5,700
Trademark (Note 2)................................................................ 2,263 13,798
Advance royalties and licenses.................................................... 580 1,341
Software development costs........................................................ 2,583 5,509
Other assets (Note 6)............................................................. 5,489 3,355
-------- -------
Total Other Assets................................................................ 16,615 29,703
-------- -------
Total Assets...................................................................... $ 47,302 $80,028
======== =======
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued expenses (Note 7).................................... $ 11,409 $13,647
Notes payable (Note 8)............................................................ -- 2,000
Current portion of long-term liabilities--Other................................... 35 156
-------- -------
Total Current Liabilities......................................................... 11,444 15,803
-------- -------
Long-Term Liabilities (Note 8):
Notes payable..................................................................... -- 8,329
Revolving credit facility......................................................... 10,138 4,064
Other liabilities................................................................. 1,412 1,554
-------- -------
Total Long-Term Liabilities....................................................... 11,550 13,947
-------- -------
Shareholders' Equity (Note 11):
Preferred stock, $2.50 par value, authorized 10,000,000 shares, 3,767 issued and
outstanding ($3,767 liquidation value).......................................... 3,745 --
Preferred stock subscribed........................................................ -- 3,500
Common stock, no par value, authorized 50,000,000 shares, issued and outstanding,
7,946,882 and 7,952,882 shares.................................................. 49,978 49,658
Retained earnings (deficit)....................................................... (28,255) (1,352)
Foreign currency translation adjustment (Note 2).................................. (1,160) (1,528)
-------- -------
Total Shareholders' Equity........................................................ 24,308 50,278
-------- -------
Total Liabilities and Shareholders' Equity........................................... $ 47,302 $80,028
======== =======

See notes to consolidated financial statements.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

Year Ended March 31,
---------------------------
2002 2001 2000
-------- ------- --------

Cash Flows From Operating Activities:
Net Income (Loss)........................................................... $(26,636) $ 914 $ 2,676
Adjustments to Reconcile Net Income (Loss)
To Net Cash Provided by Operating Activities
Depreciation and amortization............................................ 5,282 5,228 6,092
Non-cash interest expense................................................ 75 180 150
Provision for losses on accounts receivable.............................. 330 201 739
Provision for inventory revaluation...................................... -- -- 2,350
Provision for eBookMan inventory, assets and obligations................. 9,874 --
Loss (gain) on disposal of property and equipment........................ (64) 5 60
Trademark write-down..................................................... 11,147 -- --
Stock options issued for services........................................ 314 255 75
Gain on sale of REX...................................................... -- -- (8,072)
Source (use) of cash from change in operating assets and liabilities:
Accounts receivable.................................................. 4,907 (1,407) 5,597
Inventories.......................................................... 3,508 (7,145) 3,074
Prepaids and other assets............................................ (458) (1,806) 4,694
Accounts payable and accrued expenses................................ (2,698) 3,572 (8,012)
Other, net.............................................................. (23) (4) 678
-------- ------- --------
Net Cash Provided by (Used in) Operating Activities......................... 5,558 (7) 10,101
-------- ------- --------
Cash Flows From Investing Activities:
Purchase of property and equipment.......................................... (1,089) (1,735) (1,203)
Proceeds from sale of property and equipment................................ 289 -- 33
Software development costs.................................................. (1,116) (3,052) (1,500)
Proceeds from sale of REX line.............................................. -- -- 12,619
Redemption of investments in limited partnerships........................... -- -- 6,045
Enterprise Resource system costs............................................ (3,240) (369) --
Change in other assets...................................................... (24) (429) (842)
-------- ------- --------
Net Cash Provided by (Used in) Investing Activities......................... (5,180) (5,585) 15,152
-------- ------- --------
Cash Flows From Financing Activities:
Principal payments of mortgage.............................................. -- -- (3,479)
Principal payments of Senior Notes.......................................... (10,404) (2,000) (28,000)
Proceeds from revolving credit facility..................................... 6,074 4,064
Proceeds from issuance of common shares..................................... -- 244 154
Proceeds from issuance of preferred shares.................................. 3,478 -- --
Other liabilities........................................................... (233) 14 38
-------- ------- --------
Net Cash (Used in) Provided by Financing Activities......................... (1,085) 2,322 (31,287)
-------- ------- --------
Effect of Exchange Rate Changes on Cash........................................ 369 (794) 63
-------- ------- --------
Decrease in Cash and Cash Equivalents.......................................... (338) (4,064) (5,971)
Cash and Cash Equivalents at Beginning of Period............................... 2,835 6,899 12,870
-------- ------- --------
Cash and Cash Equivalents at End of Period..................................... $ 2,497 $ 2,835 $ 6,899
======== ======= ========
Supplemental Data:
Cash paid during the year:
Income taxes............................................................. $ 12 $ 20 $ (3,077)
Interest................................................................. $ 1,439 $ 1,532 $ 2,674

See notes to consolidated financial statements.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)

Accumulated
Common Stock Preferred Stock Other Total
------------------ ------------- Retained Comprehensive Shareholders'
Shares Amount Shares Amount Earnings Income* Equity
--------- ------- ------ ------ -------- ------------- -------------

Balance--March 31, 1999..................... 7,832,955 $48,784 -- $ -- $ (4,942) $ (797) $ 43,045
Issuance of common shares under employee
stock option plan........................ 40,259 153 -- -- 153
Issuance of shares and amortization of
deferred compensation expense for shares
issued for services (unearned portion
$47)..................................... 19,250 16 -- -- 16
Value of stock options granted............ -- 75 -- -- 75
Shares issued under banked vacation stock
plan..................................... 22,476 110 -- -- 110
Income for the period..................... -- -- 2,676 -- 2,676
Foreign currency translation adjustment... -- -- -- 63 63
--------- ------- ----- ------ -------- ------- --------
Balance--March 31, 2000..................... 7,914,940 49,138 -- -- (2,266) (734) 46,138
========= ======= ===== ====== ======== ======= ========
Issuance of common shares under employee
stock option plan........................ 37,942 244 -- -- 244
Issuance of shares and amortization of
deferred compensation expense for shares
issued for services (unearned portion
$26)..................................... -- 21 -- -- 21
Value of stock options granted............ -- 255 -- -- 255
Preferred stock subscribed................ 3,500 3,500 3,500
Income for the period..................... -- -- 914 -- 914
Foreign currency translation adjustment... -- -- -- (794) (794)
--------- ------- ----- ------ -------- ------- --------
Balance--March 31, 2001..................... 7,952,882 49,658 3,500 3,500 (1,352) (1,528) 50,278
========= ======= ===== ====== ======== ======= ========
Issuance of shares and amortization of
deferred compensation expense for shares
issued for services (unearned portion
$4)...................................... (6,000) 6 -- -- 6
Value of stock options granted............ -- 314 -- -- 314
Preferred stock dividend.................. 267 267 (267) --
Costs incurred in issuance of preferred
stock.................................... (22) (22)
Loss for the period....................... -- -- (26,636) -- (26,636)
Foreign currency translation adjustment... -- -- -- 368 368
--------- ------- ----- ------ -------- ------- --------
Balance--March 31, 2002..................... 7,946,882 $49,978 3,767 $3,745 $(28,255) $(1,160) $ 24,308
========= ======= ===== ====== ======== ======= ========

--------
* Comprehensive income, i.e., net income (loss), plus, or less, the change in
foreign currency balance sheet translation adjustments, totaled ($26,268) in
2002, $120 in 2001, and $2,739 in 2000.

See notes to consolidated financial statements.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

1. Line of Business

Franklin Electronic Publishers, Incorporated and its wholly-owned
subsidiaries (the "Company") design, develop, publish, and distribute handheld
electronic information products, such as electronic books (sometimes known as
eBooks), organizer products and related software. Other activities represent
less than 10% of sales, operating income and identifiable assets.

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, after elimination of intercompany accounts
and transactions. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Inventories

Inventories are valued at the lower of cost or market determined by the
first-in, first-out method of accounting.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, ranging
from three to five years for furniture, equipment, tooling and computer
software purchased and 40 years for building and improvements.

Leasehold improvements are amortized over the term of the lease or the
estimated life of the improvement, whichever is shorter. When assets are sold
or retired, their cost and related accumulated depreciation are removed from
the appropriate accounts. Any gains or losses on dispositions are recorded in
current operations. Maintenance and minor repairs are charged to operations as
incurred.

Trademark

The ROLODEX(R) Electronics trademark is carried at fair value, which was
determined by the discounted cash flow method. During the year ended March 31,
2002, the Company recorded a charge for impairment in value of the trademark of
$11,147.

Other Assets

Other Assets primarily includes Goodwill and Enterprise Resource System
Software. Goodwill of purchased businesses is recorded at cost less
amortization through March 31, 2002. Enterprise Resource System Software is
being amortized over its estimated useful life.

Freight Billed

The Company recognizes amounts billed to a customer in a sale transaction
related to shipping and handling as revenue earned for the goods provided and
is classified as sales revenue.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

Revenue

The Company recognizes revenue when it is realized. The Company considers
revenue realized when the product has been shipped or the services have been
provided to the customer, and collectibility is reasonably assured. The
Company's sales are made with right of return or exchange for defective
products within one year from the original retail purchase. Revenue is reduced
for estimated customer returns and other allowances. The Company provides for
the cost of refurbishing returned products.

Price Protection

The Company maintains a policy of providing price protection to its dealers
under which the Company issues credits in the event it reduces its prices.
These credits are generally computed by multiplying either the number of units
purchased within ninety days prior to the price reduction or the number of
units on hand at retail at the time of the price reduction by the dollar amount
of the price reduction. A provision for the related reduction in sales is made
at such time as the Company determines that a price reduction will be effective
or is reasonably anticipated.

Software Development Costs

The capitalization of such costs and the related amortization is in
accordance with SFAS No. 86. Software costs, which are capitalized after
technological feasibility is established, totaled $1,083, $3,052 and $1,500 for
the fiscal years ended March 31, 2002, 2001, and 2000, respectively.

Amortization included in the accompanying Consolidated Statement of
Operations for fiscal years ended March 31, 2002, 2001, and 2000, was $4,034,
$2,025 and $1,989, respectively. Amortization for the year ended March 31, 2002
includes a writedown of eBookMan related costs of $1,760.

Advertising Costs

Advertising costs are expensed as incurred except for direct response
advertising, the costs of which are deferred and amortized over the period the
related sales are recorded.

Fair Value of Financial Instruments

The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments. The carrying amount of the
Company's borrowings under the Senior Notes and revolving credit facility
approximates fair value.

Foreign Currency Translation

Unrealized gains and losses resulting from translating foreign subsidiaries'
assets and liabilities into U.S. dollars are deferred in an equity account on
the balance sheet until such time as the subsidiary is sold or liquidated.

As of March 31, 2002 the Company had one outstanding foreign exchange
contract entered into with a financial institution to limit its exposure to
loss, resulting from fluctuations in the value of the Euro. The market value of
this contract was $(29) on March 31, 2002 and a loss for the same amount was
recorded during the

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

period. The duration of these contracts does not exceed one year. As of March
31, 2001 the Company had three outstanding foreign exchange contracts with a
market value of $74.

Accounting for Long-Lived Assets

The Company reviews long-lived assets, certain identifiable assets and any
goodwill related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts
may not be recoverable. At March 31, 2002, the Company believes that there has
been no impairment of its long-lived assets other than the trademark asset
referred to above.

Income Taxes

The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using tax rates in effect in the years in which the differences are
expected to reverse.

Earnings (Loss) Per Share

Earnings (Loss) per common share are computed by dividing income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. The earnings per common share
computation, assuming dilution, gives effect to all potential dilutive common
shares during the period. The computation assumes that the outstanding stock
options and warrants were exercised and that the proceeds were used to purchase
common shares of the Company.

Stock Based Compensation

The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." Accordingly, no
compensation is recorded on the issuance of employee stock options at fair
market value.

Reclassifications

Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.

3. Cash and Cash Equivalents

The Company classifies as cash equivalents highly liquid investments with
maturities of less than ninety days.

4. Inventories

Inventories consist of:

March 31,
---------------
2002 2001
------- -------

Finished products $ 8,950 $16,033
Component parts.. 2,157 4,846
------- -------
$11,107 $20,879
======= =======

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

5. Property and Equipment

Property and equipment consist of:

March 31,
---------------
2002 2001
------- -------

Land..................................... $ 803 $ 843
Building and improvements................ 5,353 5,599
Furniture and equipment.................. 7,174 7,040
Tooling.................................. 6,388 5,766
Computer software purchased.............. 2,459 2,366
------- -------
22,177 21,614
Accumulated depreciation and amortization 15,189 13,963
------- -------
$ 6,988 $ 7,651
======= =======

6. Other Assets

Other Assets consist of:

March 31,
-------------
2002 2001
------ ------

Trademarks & Patents............... $ 261 $ 336
Goodwill........................... 1,408 1,842
Enterprise Resource System Software 3,175 369
Other.............................. 645 808
------ ------
$5,489 $3,355
====== ======

7. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of:

March 31,
---------------
2002 2001
------- -------

Trade accounts payable............................ $ 3,324 $ 7,125
Accrued payroll, bonus, payroll benefits and taxes 2,015 1,811
Accrued restructuring costs....................... -- 37
Accrued sales allowances.......................... 2,357 1,553
Accrued royalties................................. 346 555
Accrued expenses - other.......................... 3,367 2,566
------- -------
$11,409 $13,647
======= =======

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

8. Long-Term Liabilities

Long-term liabilities consist of:

March 31,
---------------
2002 2001
------- -------

Senior Notes payable..... -- $10,329
Revolving credit facility $10,138 4,064
Other.................... 1,447 1,710
------- -------
11,585 16,103
Less current portion..... 35 2,156
------- -------
$11,550 $13,947
======= =======

During the year ended March 31, 2002, the Company prepaid all of its Senior
Notes in the amount of $10,404.

The maturities of long-term liabilities for the five years after March 31,
2002 are as follows:

Years Ending March 31,
-------------------

2003.. 35 2006 28
2004.. 28 2007 28
2005.. 10,166

In December 1999, the Company entered into a $25,000 secured financing
facility which originally expired on December 7, 2002. In January 2002 the
maturity of the secured financing facility was extended to December 7, 2004.
Borrowings under the facility bear interest at the bank's prime rate (4.75% at
March 31, 2001) plus 3/4%, the real property and equipment advances under the
facility in the amount of $4,313 bear interest at the rate of prime plus
1-1/2%. The facility contains certain financial covenants and restrictions on
indebtedness, dividend payments, business combinations, and other related
items. As of March 31, 2002 no amounts were available for paying dividends.
Borrowings are collateralized by substantially all assets of the Company. As of
March 31 2002 the Company had an outstanding balance of $10,138 under the
facility and is in compliance with all covenants.

9. Advertising and Media Costs

Advertising costs for the years ended March 31, 2002, 2001 and 2000 were
$6,611, $5,725 and $6,412, respectively. Deferrals of direct response
advertising were not material.

10. Commitments

Lease Commitments

Rent expense under all operating leases was $795, $866 and $1,111 for the
years ended March 31, 2002, 2001 and 2000, respectively. The future minimum
rental payments to be made under non-cancellable operating leases, principally
for facilities, as of March 31, 2002 were as follows:

Years Ending March 31,
--------------------

2003.. $394 2006 $112
2004.. $319 2007 $112
2005.. $ 234

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

Royalty Agreements

The Company acquires the rights to reference works and databases from
various publishers and technology companies under renewable contracts of
varying terms. Royalties and license fees are based on a per unit charge or as
a percentage of revenue from products utilizing such databases or software
licenses.

Litigation

The Company is subject to litigation from time to time arising in the
ordinary course of its business. The Company does not believe that any such
litigation is likely, individually or in the aggregate, to have a material
adverse effect on the financial condition of the Company.

11. Shareholders' Equity

Restricted Stock Plan and Unearned Portion of Common Stock Issued for Services

The Company maintains a Restricted Stock Plan which provides for the grant
of shares of common stock for services. The shares are subject to a restriction
on transfer which requires the holder to remain employed by the Company for up
to three years in order to receive the shares. As of March 31, 2002 under the
Plan, 12,450 shares of common stock were available for distribution by the
Board of Directors.

Employee Stock Options

Under the 1998 Plan, 2,500,000 shares of common stock have been reserved for
issuance. The Plan authorizes the Company to grant options to purchase shares
of common stock to key employees, consultants and outside directors of the
Company.

The Plan provides for granting of options to purchase shares of common stock
at not less than the fair market value on the date of grant for incentive stock
options and at not less than 75% of the fair market value on the date of grant
for non-incentive stock options. An option may not be granted for a period in
excess of ten years from the date of grant. Options are not transferable by the
optionee other than upon death.

Under the terms of the Plan, an employee may deliver shares of common stock
as payment for options being exercised. The shares are valued at the closing
price on the date of exercise.

During the years ended March 31, 2002 and 2001, respectively, the company
granted 100,000 and 74,500 options to persons performing consulting services
for the company. The options were valued at a total of $207 and $437 using the
Black-Scholes option-pricing model with the expense being amortized over the
vesting period of the options. The current year's results of operations include
$314 of expense related to these options.

Accounting for Employee Stock Options

No compensation expense is recognized for options granted at fair market
value in the results of operations for its stock option plan. For disclosure
purposes, the fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for stock options granted during the years
ended March 31, 2002, 2001, and 2000, respectively: annual dividends of $0.00
for all years, expected volatility of 85.8%, 110.8%, and 116.0%, risk-free
interest rate of 4.6%, 5.8% and 5.8% and expected life of five years for all
grants. The number of shares granted, the weighted-

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

average exercise price and weighted average fair value of the stock options
granted during the years ended March 31, 2002, 2001, and 2000 was as follows:

Weighted- Weighted-
Number Average Average
of Shares Exercise Fair
Granted Price Value
--------- --------- ---------

Year ended March 31, 2000:
Exercise price equals market value....... 217,000 $5.71 $4.75
Exercise price greater than market value. 489,000 $4.00 $2.38
Exercise price less than market value.... 27,000 $5.69 $4.95
------- ----- -----
733,000 $4.57 $3.17
======= ===== =====
Year ended March 31, 2001:
Exercise price equals market value....... 554,354 $7.35 $6.07
Exercise price greater than market value. 84,000 $8.50 $4.26
Exercise price less than market value.... 25,000 $6.81 $8.70
------- ----- -----
663,354 $7.47 $5.94
======= ===== =====
Year ended March 31, 2002
Exercise price equals market value....... 399,053 $2.22 $1.59
Exercise price greater than market value. 528,714 $3.78 $1.28
------- ----- -----
927,767 $3.11 $1.42
======= ===== =====

If the Company recognized compensation cost for the employee stock option
plan in accordance with SFAS No. 123, the Company's pro-forma net income (loss)
and earnings (loss) per share would have been $(28.1) million and $(3.54) in
2002, $(0.2) million and $(0.02) in 2001, and $1.5 million and $.19 in 2000.

The following table summarizes the changes in options outstanding and the
related price ranges for shares of common stock:

Stock Options
---------------------------
Weighted Average
Shares Exercise Price
--------- ----------------

Outstanding at March 31, 1999 1,589,730 15.13
Granted................... 733,000 4.57
Exercised................. (40,259) 3.81
Expired or cancelled...... (553,763) 20.24
---------
Outstanding at March 31, 2000 1,728,708 9.28
Granted................... 663,354 7.47
Exercised................. (37,942) 7.08
Expired or cancelled...... (227,275) 10.74
---------
Outstanding at March 31, 2001 2,126,845 8.60
Granted................... 927,767 3.11
Exercised................. -- --
Expired or cancelled...... (411,138) 8.66
---------
Outstanding at March 31, 2002 2,643,474 6.66
=========

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

The following table summarizes information about stock options outstanding
at March 31, 2002:

Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------

$ 1.30-$ 2.80 338,553 9.51 $ 2.09 -- $ --
3.01- 3.50 450,214 9.91 $ 3.48 -- $ --
4.00- 4.88 426,263 6.81 $ 4.11 217,910 $ 4.05
5.00- 6.81 325,000 6.18 $ 5.56 129,375 $ 5.79
7.50 404,951 7.78 $ 7.50 186,238 $ 7.58
8.50- 11.81 393,641 5.24 $ 9.83 376,016 $ 9.78
12.38- 31.63 304,852 3.31 $16.02 304,852 $16.02
--------- ---------
$ 1.30-$31.63 2,643,474 1,214,391
========= =========

Options exercisable and the weighted average exercise price at March 31,
2001 and March 31, 2000 were 1,066,241 options and $10.90, and 927,042 options
and $12.44, respectively.

Effective March 31, 2001 the Chairman of Franklin's Board of Directors, Dr.
James H. Simons, subscribed for 3500 shares of the Company's Series A 10%
Convertible Preferred Stock in consideration for the payment of $3,500. The
preferred shares are convertible into common stock at a conversion price of
$5.00 per share and bear dividends at the rate of 10% per year, payable in
additional shares of the Convertible Preferred Stock every six months. Payment
for the subscribed shares was received by the Company in April 2001.

12. Income Taxes

The components of the net deferred income tax asset are the following:

March 31,
---------------
2002 2001
------- -------

US loss carryforward--Franklin........................ $11,460 $ 7,385
US loss carryforward--VPTI............................ 9,284 9,284
Foreign loss carryforward............................. 197 217
Inventory valuation allowances........................ 3,886 2,570
Trademark impairment charge, net of prior amortization 2,692 --
Other items (taxable) deductible in future years--net. 315 (924)
------- -------
27,834 18,532
Deferred income tax valuation allowance............... 22,134 12,832
------- -------
$ 5,700 $ 5,700
======= =======

Deferred income taxes result from temporary differences between income tax
and financial reporting computed at the effective income tax rate. A valuation
allowance has been provided to reduce the deferred income tax asset to the
amount which is expected more likely than not to be realized.

The loss carryforward of Voice Powered Technology International, Inc.
("VPTI") can be offset against future taxable income of VPTI and of Franklin
under certain circumstances. The deferred asset relating to VPTI's loss
carryforward has been offset by a valuation allowance.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

There was no provision for income taxes during the periods.

The reconciliation of income taxes shown in the financial statements and
amounts computed by applying the Federal income tax rate of 35% for the years
ended March 31, 2002, 2001 and 2000 is as follows:

Year Ended March 31,
-----------------------
2002 2001 2000
-------- ----- ------

Income before income taxes.......... $(26,636) $ 914 $2,676
======== ===== ======
Computed expected tax............... (9,322) 320 936
Effect of non-deductable expenses... 50 41 --
Change in valuation allowance....... 9,272 (361) (936)
-------- ----- ------
Provision (benefit) for income taxes -- -- --
======== ===== ======

Effective April 1, 1997, the Company filed elections with the Internal
Revenue Service to treat most of its foreign subsidiaries as divisions of the
parent for U.S. income tax reporting.

The loss carry forwards and expiration dates are the following:

Expiration
Amounts Dates
------- ----------

Franklin--US $31,800 2022
VPTI........ $26,600 to 2012
Foreign..... $ 900 to 2010

13. Operations

Under SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," the Company's operations are treated as one operating segment, as
it only reports profit and loss information on an aggregate basis to the chief
operating decision maker of the Company. Information about the Company's
product sales and major customers are as follows:

March 31,
-----------------------
Product Sales 2002 2001 2000
------------- ------- ------- -------

Reference............. $55,939 $61,460 $69,858
ROLODEX(R) Electronics 11,652 13,062 18,348
eBookMan.............. 2,471 5,209 --
REX................... -- -- 6,143
Rocket eBook.......... -- -- 1,764
Other................. 963 235 965
------- ------- -------
Total Sales........... $71,025 $79,966 $97,078
======= ======= =======

Approximate foreign sources of revenues including export sales were as
follows:

March 31,
-----------------------
Product Sales 2002 2001 2000
------------- ------- ------- -------

Europe............. $17,255 $21,702 $26,247
Other International 7,113 7,890 6,756

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

For the fiscal years ended March 31, 2002, 2001 and 2000, no customer
accounted for more than 10% of the Company's revenues.

For the fiscal year ended March 31, 2002, five suppliers accounted for more
than 10% of the Company's purchases of inventory. The five suppliers
individually accounted for 19.3%, 13.6% 13.3%, 12.9% and 11.2% of inventory
purchases.

eBookman Product Line

For the year ended March 31, 2002 the company lost $14,825 from its eBookman
operations. The loss included inventory write-downs of $6,265, write-off of
capitalized software development costs, royalties, licenses and other assets of
$3,179 and accrued price protection of $430. For the year ended March 31, 2001,
the eBookman operating loss was $3,750. As of March 31, 2002, the Company had
eBookman inventory with a carrying value of $1,500. The company believes it
will be able to recover this amount primarily through direct sales to certain
customers.

Sale of REX Product Line

In September 1999 the Company sold its REX product line for $13,250 and the
assumption of related liabilities. The Company realized a gain of $8,072 on the
sale. The assets sold consisted primarily of inventory with a carrying value of
approximately $5,000 and the Company's trademarks, copyrights, contract rights
and other assets used in connection with the REX business.

Restructuring Costs

During the year ended March 31, 2002, costs for the consolidation of Western
European Operations approximating $456 were charged to expense. Severance of
$815 was expensed during the year for changes in management and staff
reductions.

14. Web Site Development Costs

In accordance with EITF 00-2, "Accounting for Web Site Development Costs"
the Company has capitalized $25 of its web site development costs for the year
ended March 31, 2002. No web site development costs were incurred during the
years ended March 31, 2001 and 2000, which would be capitalized under EITF 00-2.

15. Recent Accounting Pronouncements

The Company will adopt SFAS No.142 at the beginning of April 2002 for all
goodwill and other intangible assets recognized in the Company's statement of
financial position as of April 1, 2002. This standard changes the accounting
for goodwill from an amortization method to an impairment-only approach, and
introduces a new model for determining impairment charges.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

The Company estimates that the implementation of these standards will reduce
amortization expense by approximately $300 per year. The Company will no longer
amortize goodwill.

The Company's Intangible Assets are stated at fair value after an impairment
charge as stated in Note 2.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

16. Summarized Quarterly Financial Data (Unaudited)

Quarter Ended
--------------------------------------------
June 30 September 30 December 31 March 31
------- ------------ ----------- --------
Fiscal 2002
-----------

Net sales....................................... $16,009 $18,714 $23,284 $ 13,018
Gross margin.................................... 6,647 3,839 11,034 (569)
Net income (loss)............................... (2,045) (5,963) 1,203 (20,186)C.
Net income (loss) per share:
Earnings per common share.................... (.26) (.75) .15 (2.54)
Earnings per common share--assuming dilution. (.26) (.75) .15 (2.54)

Fiscal 2001
-----------
Net sales....................................... $17,052 $20,511 $22,434 $ 19,969
Gross margin.................................... 7,460 8,812 9,639 8,487
Net income (loss)............................... 433 208 524 (251)
Net income (loss) per share:
Earnings per common share.................... 0.05 0.03 0.07 (0.03)
Earnings per common share--assuming dilution. 0.05 0.02 0.06 (0.03)

Fiscal 2000
-----------
Net sales....................................... $19,936 $30,445 $31,397 $ 15,300
Gross margin.................................... 4,893 10,759 12,214 7,989
Net income (loss)............................... (8,607)A. 9,748B. 2,060 (525)
Net income (loss) per share:
Earnings per common share.................... (1.10) 1.24 0.26 (0.07)
Earnings per common share--assuming dilution. (1.10) 1.24 0.26 (0.07)

--------
A. The loss of $8.6 million in the quarter ended June 30, 1999 includes an
inventory writedown and price protection $2.6 million in connection with the
Rocket eBook, $2.3 million in connection with the transition to the new
upgraded product lines and restructuring charges of $1.1 million, which
include severance related to a 15% reduction in personnel effected during
the June 1999 quarter and expenses related to the closing of certain of the
Company's foreign subsidiaries.
B. See Note 13.
C. After a charge of $11,147 for impairment in value of the Rolodex(R)
Electronics trademark, a charge of $9,874 in the year and $5,673 in the
quarter for write-down of eBookMan(R) inventory and other related assets,
and charges of $1,325 for severance payments, costs of consolidation of
European operations and a prior year Belgian tax assessment.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE--NONE

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information with respect to the Company's
Executive Officers.

NAME AGE POSITION
---- --- --------

Barry J. Lipsky 51 President and Chief Executive Officer; Director
Gregory J. Winsky 52 Executive Vice President, Business Development, General Counsel, and
Secretary
Arnold D. Levitt 65 Senior Vice President, Chief Financial Officer; Treasurer
Andrew D. Horsfall 42 Vice President, Worldwide Sales and Marketing

Mr. Lipsky joined the Company as Vice President in February 1985. He was
elected Executive Vice President of the Company in 1997, Interim President and
Chief Operating Officer in April 1999 and President and Chief Executive Officer
in May 1999. Mr. Lipsky is a director of Voice Powered Technology
International, Inc., an approximately 82% owned subsidiary of the Company.

Mr. Winsky was elected Vice President and Secretary of the Company in June
1984, was elected Senior Vice President in January 1993 and was elected
Executive Vice President in July 1999. Mr. Winsky is Chief Executive Officer
and a director of Voice Powered Technology International, Inc., an
approximately 82% owned subsidiary of the Company.

Mr. Levitt joined the Company in May 1999 as Interim Chief Financial Officer
and Treasurer and was elected Senior Vice President, Chief Financial Officer
and Treasurer of the Company in September 1999. Mr. Levitt has been engaged in
consulting as a chief financial officer or senior business adviser for
companies in a variety of industries since 1996. Prior to these consulting
arrangements, Mr. Levitt was Executive Vice President and Chief Operating
Officer of WIC Gaming Supply Corp. Mr. Levitt has owned or was employed as a
chief financial officer of a number of companies and also worked in public
accounting. Mr. Levitt is Chief Financial Officer and a director of Voice
Powered Technology International, Inc., an approximately 82% owned subsidiary
of the Company.

Mr. Horsfall joined the Company in April 2002 as Vice President, Worldwide
Sales and Marketing. From November 1994 to June 1999 he managed the Company's
sales and marketing subsidiary in Australia and during 2000 he acted as a sales
and marketing consultant to the Company.

Additional information called for by Item 10 is set forth under the heading
"Election of Directors" in the Company's Proxy Statement for its 2002 annual
meeting of stockholders (the "2002 Proxy Statement"), which is incorporated
herein by this reference.

ITEM 11. EXECUTIVE COMPENSATION

Information called for by Item 11 is set forth under the heading "Executive
Compensation" in the 2002 Proxy Statement, which is incorporated herein by this
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Equity Compensation Plan Information

The following table gives information about the Company's common stock, no
par value ("Common Stock") that may be issued upon the exercise of options,
warrants and rights under all of the Company's existing equity compensation
plans as of March 31, 2002, including the Company's 1988 Stock Option Plan, the
Company's 1998 Stock Option Plan, the Company's Restricted Stock Plan, the
Company's Sales Representative Stock Option Plan and various Stock Option
Agreements to which the Company is a party.

(c)
(a) Number of
Number of securities remaining
securities to be (b) available for future
issued upon Weighted average issuance under
exercise of exercise price of equity compensation
outstanding outstanding plans (excluding
options, warrants options, warrants securities reflected
Plan Category and rights and rights in column (a))
------------- ----------------- ----------------- --------------------

Equity compensation plans
approved by security holders... 2,393,474 $6.83 537,003
Equity compensation plans not
approved by security holders(1) 263,750 $4.83 312,450
--------- -------
Total......................... 2,657,224 $6.63 849,453
========= =======

--------
(1) Includes (i) the Company's Restricted Stock Plan, (ii) the Company's Sales
Representative Stock Option Plan, and (iii) the Stock Option Agreements
entered into between the Company and each of Arnold D. Levitt, Gerard
Klauer Mattison and Peter Yianilos, each of which is described below.

Restricted Stock Plan

The Company maintains a Restricted Stock Plan which provides for the grant
of shares of Common Stock for services. The shares are subject to a restriction
on transfer which requires the holder to remain employed by the Company for up
to three years in order to receive the shares. As of March 31, 2002, under the
Restricted Stock Plan, 12,450 shares of Common Stock were available for
distribution by the Board of Directors.

Sales Representative Stock Option Plan

In an effort to provide an incentive to the Company's sales representatives
to continue to sell, and increase sales of, the Company's products and to
attract new sales representatives to sell the Company's products, in March 2002
the Board of Directors adopted the Sales Representative Stock Option Plan (the
"Sales Representative Plan"). Pursuant to the Sales Representative Plan, the
Company will grant options to those of its sales representatives who elect to
participate in the Sales Representative Stock Option Program ("Program").

The Company has authorized under the Sales Representative Plan options to
purchase 300,000 shares of Common Stock. Commencing July 1, 2002, for each
calendar year that a sales representative elects to participate in the Program,
the Company will grant to such sales representative, within 30 days following
the end of each calendar quarter during such calendar year, an option to
purchase the number of shares of Common Stock as shall equal the product of (x)
..005 and (y) the aggregate net sales of the Company's products effected by such
sales representative in such sales representative's geographic territory during
the preceding calendar quarter.

The exercise price for each option that is granted with respect to sales of
the Company's products in calendar year 2002 will be $1.40 per share (the fair
market value of a share of Common Stock on the last trading day of 2001), and
the exercise price for each option that is granted with respect to sales of the
Company's products in each calendar year following 2002 will be the fair market
value of a share of Common Stock on the last trading day of the preceding
calendar year.

Each option granted under the Sales Representative Plan will be exercisable
commencing on the first anniversary of the date of its grant and will
automatically terminate on the fourth anniversary of the date of grant.

In consideration of the Company's agreement to issue options pursuant to the
Program, for each calendar year that a sales representative elects to
participate in the Program, the sales commission percentage otherwise payable
to such sales representative with respect to such sales representative's sales
of the Company's products will be reduced by 1%.

Participation in the Program will be offered to the Company's sales
representatives following effectiveness of a registration statement that will
be filed with respect to the options issueable pursuant to the Sales
Representative Plan and with respect to the shares of Common Stock issueable
upon exercise of such options.

Stock Option Agreements

In July 1999, in connection with the hiring of Arnold D. Levitt, our Senior
Vice President, the Company entered into a Stock Option Agreement pursuant to
which the Company granted Mr. Levitt an option to purchase 50,000 shares of
Common Stock at an exercise price of $4.00 per share, the fair market value of
the Common Stock on the date of grant. Options with respect to one-fourth of
the shares become exercisable on each of the first, second, third and fourth
anniversaries of the date of grant.

In May 2001, in connection with the retention of New York investment bank
Gerard Klauer Mattison (GKM) as its financial advisor, the Company entered into
an Agreement pursuant to which the Company granted GKM a warrant to purchase
100,000 shares of Common Stock at an exercise price of $5.00 per share. The
fair market value of the Common Stock on the date of grant was $3.10 per share.

In August 1999, in connection with entering into a consulting agreement with
Peter Yianilos, an engineering consultant, the Company entered into a Stock
Option Agreement pursuant to which the Company granted Mr. Yianilos an option
to purchase 50,000 shares of Common Stock at an exercise price of $4.00 per
share, the fair market value of the Common Stock on the date of grant. The
option vested in its entirety on February 16, 2001. In June 2000, the Company
entered into an additional Stock Option Agreement with Mr. Yianilos pursuant to
which the Company granted Mr. Yianilos an option to purchase an additional
50,000 shares of Common Stock at an exercise price of $7.50 per share, the fair
market value of the Common Stock on the date of grant. This option vested in
its entirety on June 24, 2001.

Additional information called for by Item 12 is set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the 2002
Proxy Statement, which is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information called for by Item 13 is set forth under the heading "Certain
Relationships and Related Transactions" in the 2002 Proxy Statement, which is
incorporated herein by this reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Financial statements and schedules filed as a part of this report are listed
on the "Index to Financial Statements" contained herein. All other schedules
are omitted because (i) they are not required under the instructions, (ii) they
are inapplicable or (iii) the information is included in the financial
statements. During the Quarter ended March 31, 2002, the Company filed Reports
on Form 8-K on each of January 3, 2002 and March 12, 2002.

EXHIBITS

EXHIBITS NO.
------------

3.01 -- Certificate of Incorporation of Franklin (Incorporated by reference to Exhibit 3.01 to
Registration Statement on Form S-1, File No. 3-6612 (the "Company's 1986 S-1 Registration
Statement"))

3.02 -- Articles of Amendment to the Certificate of Incorporation of Franklin (Incorporated by
reference to Exhibit 3.02 to the Company's 1990 report on Form 10-K for the year ended
March 31, 1990 (the "Company's 1990 10-K"))

3.03 -- Amended and Restated Statement of Rights and Preferences of Series A 10% Convertible
Preferred Stock (Incorporated by reference to the Exhibit to the Company's Report on Form
8-K filed May 23, 2001)

3.04 -- By-laws of Franklin (Incorporated by reference to Exhibit 3.02 to the Company's 1986 S-1
Registration Statement)

3.05 -- Amendment to By-laws of Franklin (Incorporated by reference to Exhibit A to the Company's
Proxy Statement relating to the 1987 Annual Meeting of Shareholders)

3.06 -- Amendment to By-laws of Franklin (Incorporated by reference to Exhibit 3.05 to the
Company's 1990 10-K)

10.01 -- Standard form of Sales Representative Agreement (Incorporated by reference to Exhibit 10.07 to
the Company's 1986 S-1 Registration Statement)

10.02** -- Franklin Restricted Stock Plan, as amended (Incorporated by reference to Exhibit 10.13 to the
Company's report on Form 10-K for the year ended March 31, 1987)

10.03** -- Franklin 1988 Stock Option Plan as Amended and restated effective as of July 24, 1996
(Incorporated by reference to the Company's Proxy Statement relating to the 1996 Annual
Meeting of Shareholders)

10.04 -- Loan and Security Agreement dated as of December 7, 1999 among Banc of America
Commercial Finance Corp., Franklin, Franklin Electronic Publishers (Europe) Ltd., and
Franklin Electronic Publishers (Deutchland) GmbH (Incorporated by reference to the Exhibit
to the Company's Report on Form 8-K filed on December 14, 1999)

10.05** -- Franklin 1998 Stock Option Plan as Amended and Restated effective July 20, 2001
(Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-8
filed on August 27, 2001)

10.06** -- Stock Option Agreement dated July 28, 1999 between the Company and Arnold D. Levitt
(Incorporated by reference to Exhibit 4(e) to the Company's Registration Statement on form
S-8 filed on December 14, 1999)

10.07** -- Stock Option Agreement dated August 16, 1999 between the Company and Peter N. Yianilos
(Incorporated by reference to Exhibit 4(g) to the Company's Registration Statement on form
S-8 filed on December 14, 1999)

EXHIBITS NO.
------------

10.08**++ -- Sales Representative Stock Option Plan

10.09**++ -- Sales Representative Stock Option Program

21+ -- List of subsidiaries of the Company

--------
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(c) of this report.
++ To be filed at a later date.
+ Filed herewith.

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED

Dated: June 26, 2002 By: /s/ BARRY J. LIPSKY
------------------------------------
Barry J. Lipsky
PRESIDENT AND CHIEF EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

Signature Title Date
--------- ----- ----

/S/ EDWARD H. COHEN Director June 25, 2002
-----------------------------
Edward H. Cohen

/s/ BARRY J. LIPSKY Director June 26, 2002
-----------------------------
Barry J. Lipsky

----------------------------- Director June , 2002
Leonard M. Lodish

/s/ JAMES MEISTER Director June 24, 2002
-----------------------------
James Meister

/s/ HOWARD L. MORGAN Director June 26, 2002
-----------------------------
Howard L. Morgan

----------------------------- Director June , 2002
Jerry R. Schubel

----------------------------- Director June , 2002
James H. Simons

/s/ WILLIAM H. TURNER Director June 26, 2002
-----------------------------
William H. Turner

/S/ ARNOLD D. LEVITT Senior Vice President, Chief June 26, 2002
----------------------------- Financial Officer and
Arnold D. Levitt Treasurer (Principal
Financial and Accounting
Officer)

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